Reserve Bank ‘nonsense’ costing South Africans at least R4,000 per month, says economist

 ·22 Apr 2024

An economist has warned South Africans that they are paying the cost of an unnecessarily harsh monetary policy, which is closing households at R4,000 a month at least.

According to economist Roelof Botha, South Africa’s interest rates do not need to be as high as they currently are.

Botha teaches economics (part-time) at the Gordon Institute of Business Science (GIBS) and is the Economic Advisor to the Optimum Financial Services Group.

The South African Reserve Bank’s Monetary Policy Committee (MPC) began its current hiking cycle in November 2021, after observing an upward trend in the country’s inflation.

Since then, the South African Reserve Bank has increased interest rates by a total of 475 basis points. Currently, the repo rate is at a 14-year high of 8.25% and the prime lending rate is at 11.75%.

The MPC has maintained that it will continue to keep rates high until inflation becomes sustainable and decreases to the midpoint of its target range of 4.5%.

The latest inflation rate for March was 5.3%, according to the Consumer Price Index (CPI).

Economist, Dr Roelof Botha.

However, Botha said the MPC never had reason to start its “nonsense” of raising rates this high, as South Africa did not have demand inflation.

“It was never necessary to raise interest rates to the levels they did. Now, a little bit more than two years later, households are paying 9% of their disposable income on average on servicing debt,” he said.

This proportion can be drastically higher if you start looking at specific income bands, added Botha.

In other words, Botha noted that the average South African homeowner has been paying an extra R4,000 on their home loan every month since the Reserve Bank started raising interest rates.

This is just an average and some people may actually be paying much more when you take into account other debts, such as secured credit, furniture and motor accounts, and other credit facilities.

Botha highlighted that this additional cost could have been spent on goods and services, which could have stimulated the economy and created more jobs.

He further explained that the mission of the SARB’s MPC has two sides, the first of which is to keep inflation down.

However, this is the only side it seems to understand, as the second one is to avoid applying monetary policy so strictly that the country fumbles economic growth and job creation.

Botha’s sentiment seems to align with that of other Economists within FNB, who warned that if the South African Reserve Bank (SARB) maintains its high interest rates beyond what is necessary, the country could experience a technical recession.

FNB said that prolonging rate cuts beyond when high rates are necessary could further stifle growth and heighten the likelihood of a technical recession.

This is particularly true when broader financial conditions in South Africa are already restrictive. They said the US Fed rate has a big impact on financial conditions worldwide.

However, the economists noted that the financial conditions and consumer perspectives in the US significantly differ from those in South Africa.

Therefore, the MPC needs to consider initiating rate cuts despite the risks associated with the fiscal environment and inflation, as these risks could mean further delays and longer restrictions on household consumption expenditures.


Read: Reserve Bank hints at next interest rate decision in May

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